Thursday, February 04, 2016

More FCC Rules with Flawed Analyses Likely on the Way

In August 2015, I wrote a blog entitled “FCC’s ‘Gatekeeper’ Theory Is a Flawed Market Failure Analysis,” explaining how the FCC’s 2015 Open Internet Order fails a basic cost/benefit analysis and how it misuses data in order to support its claim that competition in the broadband market is lacking. Then, in January 2016, FSF President Randolph May and I wrote a blog entitled “Mobile Broadband Is a Substitute for Fixed Broadband,” where we state that the FCC continues to misrepresent competition in the broadband market by refusing to acknowledge the extent to which mobile broadband, for an increasing segment of the U.S. population, is a substitute for various fixed broadband services.
In a Hill article on January 20, 2016, Mario Trujillo reported that advocacy groups have been pressing the FCC to adopt Internet privacy rules. In a letter to the FCC, the advocacy groups say: “[Internet service providers’] position as Internet gatekeepers gives them a comprehensive view of consumer behavior and until now privacy protections for consumers using those services have been unclear.” The letter urges the FCC to “move forward as quickly as possible on a Notice of Proposed Rulemaking proposing strong rules to protect consumers from having their personal data collected and shared by their broadband provider without affirmative consent.”
The longer the Open Internet Order is in effect, the more people will realize that the regulatory costs imposed by the Order are stifling innovation and investment from both Internet service providers and edge providers. (See my October 2015 blog and Randolph May’s December 2015 blog for more on this.) However, there is reason to worry that if the FCC continues to misuse data to claim that “gatekeepers” eliminate choices for consumers, that switching costs create monopolies, and that mobile broadband should not be included in an analysis of broadband marketplace competition, then the FCC will be able to use these claims to justify adopting more Internet regulations.
Regardless of how Internet privacy rules would positively or negatively impact consumers, it should be concerning that the Commission could (and likely will) use misguided analysis to adopt such rules. In evaluating whether Internet privacy rules (and other regulations) benefit competition, consumers, and economic growth, it is imperative that they be supported by accurate data and valid cost/benefit analyses. But if the data and analysis used to inaccurately describe the broadband market during the Open Internet proceeding is used to draft Internet privacy rules, then the proceeding will start off on the wrong foot.

Tuesday, February 02, 2016

United States Is Still a Global Leader in Broadband

On January 29, 2016, the FCC released its Fifth International Broadband Data Report, showing that the United States is a global leader in terms of broadband coverage, subscriptions, prices, and speeds. This is impressive considering that the U.S. is very large geographically and has a low population density, relative to the other global leaders. Therefore, it is difficult to compare the U.S. to a small and densely populated country, like Singapore, because it is significantly more costly to provide broadband in the U.S. to all Americans than it is to provide broadband to all Singaporeans. Nevertheless, the U.S. fared well in the rankings.
Here are some of the report’s key findings:
  • At the end of 2014, 89 percent of households in the U.S. had access to high-speed broadband (at least 30 Mbps down), while only 68 percent of households in Europe had such access.
  • From December 2013 to December 2014, U.S. rural broadband coverage increased from 45 percent of households to 58 percent of households. In Europe, over the same span, rural broadband coverage increased from 18 percent of households to 25 percent of households.
  • The U.S. ranked first in the OECD in both fixed and mobile subscriptions, but that is mostly because it has the largest population. In terms of the percentage of the population, the U.S. ranked 16th out of 34 OECD countries in fixed subscriptions and 8th in mobile subscriptions.
  • The United States ranked 26th out of 40 countries in 2014 in terms of actual download speeds. The countries at the top of the ranking are very small geographically and densely populated. Singapore, Hong Kong, and Korea are first, second, and third, respectively. However, when compared at the state level, nine U.S. states ranked in the top quartile in 2014.
  • In terms of pricing, the U.S. ranked 7th least expensive out of 15 countries for fixed plans with speeds between 1 and 5 Mbps, 16th least expensive out of 27 countries for fixed plans with speeds between 5 and 15 Mbps, and 22nd least expensive out of 30 countries for fixed plans with speeds between 25 and 50 Mbps.

The prices of broadband plans in the United States are important for understanding how U.S. broadband providers have invested $1.4 trillion in broadband infrastructure since 1996. As broadband speeds increase, the United States’ rank among other countries in terms of prices goes down, meaning that prices and speeds are positively correlated. Because prices are scaled with the quality and quantity of broadband plans, such market pricing incentivizes broadband providers to invest in capital-intensive next-generation networks, while also allowing low-income consumers to afford basic level broadband plans. (See my April 2015 Perspective from FSF Scholars entitled “The Research is Clear: The U.S. Invests More in Broadband Than Europe” for more on how dynamic investment is the result of market pricing.)
The findings in the FCC’s report show that the United States is still certainly a global leader in broadband Internet access. (See this August 2014 paper by Roslyn Layton and me entitled “Innovation, Investment, and Competition in Broadband and the Impact on America’s Digital Economy.”) The data in the report stops at the end of 2014, which was just before the FCC adopted its February 2015 Open Internet Order. Although the U.S. may not lead in all categories, market-based policies over the past 20 years have incentivized broadband providers to expand broadband coverage, increase the quality of connections with faster speeds, and lower prices for consumers. Ultimately, this has led to more broadband subscriptions and satisfied consumers throughout the country.  
On the other hand, Internet regulations, like those in the Open Internet Order, could stifle investment and innovation among U.S. broadband providers, closing the gap between the United States and the rest of the world. (See my October 2015 blog for more on the adverse impact of Internet regulation on broadband investment.)

Tuesday, January 26, 2016

Licensed Spectrum Enables the App Economy and Create Jobs

On January 25, 2016, the Progressive Policy Institute published a report entitled “App Economy in Europe (Part 1).” Michael Mandel writes that the app economy in Europe comprises 1.64 million jobs with the United Kingdom (321,200 jobs) and Germany (267,900 jobs) leading the way. The report also states that the app economy in the Unites States comprises 1.66 million jobs and that the U.S. has a higher “app intensity” (app economy jobs as percentage of all jobs) than Europe with 1.2 percent and 0.7 percent, respectively.
Today, January 26, 2016, CTIA – The Wireless Association and Recon Analytics released a new report entitled “The Impact of 10 MHz of Licensed Spectrum,” which finds that the average impact of an allocation of 10 MHz of licensed spectrum from 2011-2014 was the creation of an additional 1.6 million jobs and $24.3 billion in economic activity. The report also finds that in 2014 the U.S. wireless industry contained 7.03 million jobs and created $194.8 billion in annual economic activity.
With the app economy included, the use of licensed spectrum has (directly or indirectly) created over 8.6 million jobs in the U.S. economy. As I wrote in a November 2015 blog, it is important that Congress remove regulatory barriers that stifle the growth of mobile broadband and reallocate licensed spectrum. This would benefit consumers – by incentivizing more investment in mobile services – and benefit workers – by creating more jobs in the mobile services sector and app economy.

Monday, January 25, 2016

Maryland Has the 7th Highest State and Local Tax Burden



On January 20, 2016, the Tax Foundation released its State-Local Tax Burden Rankings FY 2012 study, co-authored by Liz Malm and Gerald Prante. The rankings show the average state and local tax burden as a percentage of state income – with the No. 1 ranking indicating the state with the highest state and local tax burden as a share of state income and No. 50 indicating the state with the lowest tax burden. New York ranks No. 1 with a 12.7% state and local tax burden and Alaska ranks No. 50 with 6.5%.

Unfortunately, Maryland ranks No. 7 with a 10.9% state and local tax burden. The 2012 data are the most recent figures available from the Census Bureau, the Bureau of Economic Analysis, and the other sources used by the study’s authors. While it is only conjecture at this point, based on the significant tax hikes implemented after 2012 during Governor Martin O’Malley’s tenure, it would not be surprising if Maryland’s tax burden ranking is even higher when the next similar study is published.

This high ranking (and the relatively high tax burden it signifies) is certainly relevant as the General Assembly begins considering Governor Larry Hogan’s budget and tax proposals. For Fiscal Year 2017, Governor Hogan has proposed an operating budget of $17.1 billion, with approximately $480 million in tax and fee relief over the next five years. Given Maryland’s ranking in the Tax Foundation’s latest study (and several others as well) as a high tax state, the modest tax relief proposed by Governor Hogan is welcome. Considering that the $480 million reduction is spread over five years, it is difficult to argue that the tax relief proposal is anything but modest. (From an economic perspective, fees, such as those businesses pay for permits that Governor Hogan proposes to reduce, have the same effect as taxes.)

In considering Maryland’s tax burden, and Governor Hogan’s tax relief proposal, it is also relevant to have in mind Maryland’s position vis-à-vis its neighboring states. Significantly, Maryland is the highest ranked among its neighbors. Pennsylvania (15th; 10.2%), Delaware (16th; 10.2%), West Virginia (18th; 9.8%), and Virginia (25th; 9.3%) all have lower tax burdens as a share of state income. To be sure, the differences among the states are not huge, but they may be large enough to affect the behavior of individual citizens and businesses as they make decisions concerning where to locate, how much to invest in new enterprises, whether to add additional employees, and the like.

Maryland has a lot more work to do to ensure that its long-term economic well-being is secure. For one thing, it needs to improve its business climate by engaging in meaningful regulatory reform. On this score, see this new Perspectives from FSF Scholars by Randolph May and Michael Horney titled “Achieving Efficient Government and Regulatory Reform in Maryland.” With the appointment of his Regulatory Reform Commission and the issuance of its first report discussed in our Perspectives, Governor Hogan has made a good start. Our paper contains some additional regulatory reform proposals.

Likewise, Governor Hogan’s budget, with its proposed $480 million in tax relief, is another positive step, albeit a fairly modest one, in the right direction. There is no reason for Marylanders to take pride in having the seventh highest tax burden in the nation as a percentage of state income.

Wednesday, January 20, 2016

Permanently Ban Internet Access Taxes

On January 19, 2016, Steve Pociask, President of the American Consumer Institute, published a Forbes article entitled “Keep The Internet Tax-Free.” Mr. Pociask says that the proposed provisions included in H.R. 644, which would permanently ban Internet access taxes, should be supported for a couple of reasons. He states that taxes on Internet access would reduce revenues for Internet service providers (ISPs) and would increase the price consumers pay for Internet access. Mr. Pociask states that such revenue losses would stifle investment and lead to fewer jobs created in the information economy because ISPs would not be able to cover their fixed costs. He also says that an increase in the price of Internet access would discourage prospective consumers from adopting Internet access and discourage current consumers from expanding their use of Internet-based services, ultimately leading to less tax revenue, not more.
The Internet has brought wonderful benefits to consumers over the past 20 years, but artificially increasing the price of Internet access (through federal, state, or local taxes) would certainly harm innovation and investment and diminish consumer benefits. It is time that Congress permanently ban Internet access taxes.
Read Mr. Pociask’s article here.

Verizon’s New FreeBee Plan



Here is FSF’s President Randolph May’s reaction to Verizon’s announcement of its new sponsored data plan called FreeBee:

“With Verizon’s announcement, it looks like variations of sponsored data and zero-rating plans are blossoming like Spring flowers, with each offering having different features. This is a good thing for consumers. This experimentation is the way that business models evolve to meet consumer demands for services they value, and it is especially important to allow such experimentation to continue at this stage of the Internet’s development. Of course, the other aspect of plans like Verizon’s and others is that, by allowing content providers to pay for some of the overall network costs, end user consumers are required to pay less. Thus zero-rating and sponsored data plans are even more beneficial to low-income persons than those further up the income scale. That’s just one reason it’s odd to see so-called consumer groups object to these plans. I don’t think there have been that many objections raised by real live actual consumers.”

Friday, January 15, 2016

Four Reasons to Reject Piracy of Movies

If you haven't seen Rob Atkinson's response in HuffPo to a piece by Reason's Nick Gillespie defending, if not extolling, piracy of movies, then you really should. Rob's piece is titled, "No, Piracy Is Not the Sincerest Form of Flattery."

Rob makes these excellent points in response to Gillespie's wrong-headed defense movie piracy:
  • "First, these films were pirated because they were popular, not the other way around."
  •  "Second, Gillespie's claim that filmmakers rarely lose money to piracy is patently false."
  •  "Third, Gillespie's argument that piracy helps keep movies circulating in the public 'long after the industry PR machine has shut down' ignores the bevy of legal alternatives that consumers have to easily find legal versions of just about any content they want."
  • "Finally, one would expect the editor of a libertarian publication like Reason to not only respect the property rights of content holders, but also to respect the free market."
In support of this last point I was pleased, and grateful, that Rob referred to the new book, The Constitutional Foundations of Intellectual Property - A Natural Rights Perspective, co-authored by Seth Cooper and me. In our book, I think we demonstrate that, in large part, the Founders were motivated to include the Intellectual Property Clause in the Constitution to protect the fruits of the labors of authors and inventors and other creators -- which fruits, as a matter of natural right, become the property of those who labor to them.

One of our chief motivations in writing the book was to invite those who call themselves conservatives, libertarians, constitutionalists, or the like -- but, who, for whatever reason, don't respect IP rights -- to consider the reasons why the IP Clause is included in the Constitution and to respect intellectual property just like other forms of property. And surely not to dismiss the need to safeguard intellectual property just because it finds its way online.

I respect Nick Gillespie, I've read many of his works, and I share some of his views. But I certainly don't agree with his paean to piracy of IP, and I don't see how it is in any way compatible with a respect for property rights and a functioning free market.

Thursday, January 14, 2016

Mobile Broadband Is a Substitute for Fixed Broadband



By Randolph J. May and Michael J. Horney

On December 21, 2015, John Horrigan and Maeve Duggan of the Pew Research Center released a new report entitled “Home Broadband 2015.” A significant takeaway from the report is that the percentage of adults in the United States with a home broadband connection slightly declined from 70 percent in 2013 to 67 percent in 2015. During the same span, the percentage of “smartphone-only” adults increased from 8 percent to 13 percent. This negative correlation in adoption patterns means that as mobile networks continue to improve with respect to speed, latency, and coverage, more and more consumers are considering mobile broadband to be a substitute for fixed broadband.

Individuals have different preferences, so while some consumers may use a mobile broadband subscription as a substitute for a fixed home broadband subscription, other consumers may not find this attractive. Certainly income plays a role in determining an individual’s preferences. For example, a wealthy consumer in a large household may more readily view fixed and mobile subscriptions as “complements,” while a low-income individual, who lives alone, may more readily identify the two as “substitutes.” As the Pew report states, “smartphone-only” adults are generally younger, lower-income, and non-white. And despite the fact that household incomes have declined in recent years relative to 2000 levels, Mr. Horrigan and Ms. Duggan say smartphones and mobile connections have filled the digital divide gap.

A demonstration of the substitutability of fixed and mobile broadband is important in no small measure because the FCC "misinterprets" data to suggest that the broadband market is not competitive. Notably, in the FCC’s February 2015 Open Internet Order, the Commission claims that “mobile broadband is not a full substitute for fixed broadband connections.” More recently, in the FCC’s December 2015 Wireless Competition Report, the Commission claims that “mobile and fixed services are not co-extensive in their capabilities.” The FCC apparently makes these claims in order to justify its flawed market analysis, suggesting that consumers and edge providers do not have choices when it comes to broadband Internet access because claimed switching costs and “gatekeepers” stand in the way. Although the claim is still very flawed, it is much easier to make such a claim about broadband competition if the entire mobile broadband market is eliminated from the data sample. (See Michael Horney’s August 2015 blog for more on this.)

On December 30, 2015, the FCC released its 2015 “Measuring Broadband America Report.” The report highlights the following findings: actual speeds experienced by most ISPs’ subscribers are close to or exceed advertised speeds; average speeds more than tripled from March 2011 to September 2014; and consumers subscribing to faster services (15-30 Mbps down) tend to migrate upward to a service tier with a higher advertised download speed, while only a small percentage of consumers with slower services (less than 15 Mbps down) migrate upward. The last finding shows that the consumers who value faster broadband service are willing to pay for such service. Similarly, consumers who value having both a fixed and mobile broadband subscription are willing to pay for both, while those who do not value having both may use mobile broadband as a substitute for fixed broadband or vice versa.

FSF Board of Academic Advisor member Gus Hurwitz wrote an article on January 6, 2016, entitled “Is Good Broadband News for Consumers Bad News for the FCC?” Given that the 2015 “Measuring Broadband America Report” contained such positive news for broadband consumers, Mr. Hurwitz finds it interesting that the FCC would release the report during the slowest news week of the year, especially considering that the previous years’ reports were released during the summer. Referring to the positive findings in the FCC’s report, Mr. Hurwitz writes:

All of this tends to contradict the concerns used to justify the FCC’s recent interventionist agenda. Chairman Wheeler’s aggressive plans are built on fears that the broadband market offers too few consumers too few options of too little quality for too much money. This report paints a very different picture: the market is consistently giving consumers increasingly better service at ever-lower prices. Importantly, the data for this report are from September 2014, so they predate the FCC’s recent efforts to “protect and promote” competition.

It is unfortunate that the FCC would misuse data to promote its pro-regulatory agenda. Maybe the report was released as soon as it was finished. Regardless, it is clear that a snapshot of the broadband market as it actually existed during the Open Internet proceeding looks vastly different from what the FCC depicted in its Open Internet Order.

It’s time for the FCC to recognize that mobile broadband and fixed broadband are substitutable services. Even assuming for the sake of argument that the data available in February 2015 (when the Open Internet Order was drafted) somehow suggested that the two were not substitutable (although the data did not suggest this), did FCC officials really think that mobile connections were not rapidly improving in quality and decreasing in price-relativity over time?

The fact that 13 percent of Americans in 2015 were “smartphone-only,” which is more than a 60 percent increase in two years, shows that a growing number of consumers perceive mobile and fixed broadband to be substitutable services. And the fact that the most recent government report shows that nearly half of U.S. households are “wireless only” is relevant too.  Surely, many of the consumers in these households will be upgrading to smartphones in the near term.

The increasing substitutability of mobile and fixed broadband services is making an already competitive broadband market even more competitive. The Commission should not ignore the actual realities of the marketplace and clear patterns of consumer behavior in order to pursue a pro-regulatory agenda. Indeed, it's time for the Commission to change its pro-regulatory mindset so that, in the absence of clear and convincing evidence to the contrary, the agency presumes the existence of competition rather than the other way around.